Saturday, 1 March 2014

Credit and Real Estate - The Connection

The financial system of the United States of America can be pretty confusing, especially to the common person. One question that is often asked is how the credit crisis affects the real estate market. The answer may not be obvious, since the finance and real estate sectors are distinctly separate entities. Taking a good look at how the two relate does reveal how the two interact, and how a crisis for one affects the other.

The current economic crisis has seen a marked downturn in credit for everyone, as well as a serious loss of real estate value. This is because credit is so strongly intertwined with real estate that they will fall and rise together, like twins joined at the hip. Think about it: most homes are actually bought on credit. There are very few people who have enough money on hand to buy homes outright, so most people turn to lending companies and banks for assistance. This is the biggest amount of credit that any average person will owe, and so it pretty much defines the relationship and importance of credit in real estate. Without a means of acquiring property while not having the money on hand, the real estate market would stagnate and shrink.

Now, what happens when a crisis strikes the credit world? Economic downturns lead to the loss of capital, and so banks and financial institutions lose a fair amount of money as well. This in turn means that they have less money to pay for purchases on the behalf of their clients, thus reducing the amount of credit they can extend to customers. If the loss means that the upper limit on loans goes down, or that loan approvals need to become more selective and strict, then applications for home loans go down too.

With less loans having sufficient values and fewer loans being approved, there is less activity in the real estate sector. The slowdown means that prices will stagnate and drop over time due to age-related losses on properties. A house which could have been sold brand new for tens of thousands of dollars will lose several hundred in value as long as it is exposed to the elements without someone to live inside and take care of it.

Some experts argue that the current economic crisis is a vicious cycle of events that started with the loss of faith in the American way of doing things. The Iraq war in recent years, as well as the anti-terrorist hostilities for almost a decade saw the USA's strong involvement. Some saw it as meddling with affairs outside one's place, and so lost appreciation for the USA. This meant that less people wanted to go to the USA or invest in American companies, leading to losses in real estate and credit. As can be surmised from previous statements, these losses can cycle back on each other and make everything worse. With the new President, Barack Obama, there is hope for major changes that can save the US economy, though only time will tell.